State Taxation of The Sharing Economy - My Notes From the Paul J. Hartman SALT Forum

As I was sitting in the State Taxation of the Sharing Economy (i.e, Uber, Airbnb, etc.) session at the Paul J. Hartman State and Local Tax Forum presented by Jeremy Abrams, French Slaughter and Reid Okimoto last week, I took some notes. Here are a few of them:

1. How you characterize a charge (i.e., label it) and the contract language will most likely determine how the charge is taxed for sales tax purposes.
2. Will states 'back into' the characterization?
3. How do you source the sharing economy? By service address, billing address, or where the transaction starts or ends?
4. Does the Internet Tax Freedom Act pre-empt any sales taxation of the sharing economy?
5. Is physical presence 'nexus' MORE important, NOT less important due to technology advances and changes in how transactions occur?

Dot Foods & Washington: A Case Study on Intent, Interpretation and Retroactivity

Regardless of whether you have been following Dot Foods v. Washington Department of Revenue cases for the last several years, we need to pause and review.

According to the decision, Dot Foods 1  involved Dot Foods utilizing an exemption from the Washington Business & Occupation (B&O) tax for many years (note: the statute was originally enacted in 1983). Dot Foods facts changed from 1997 to 2000, but Dot Foods interpreted the exemption to still apply. In 1999, the state revised its interpretation of the statute to narrow the exemption, under which, Dot Foods would no longer qualify.

Washington later audited and assessed Dot Foods additional tax for the 2000 to 2004 tax years based on the state's revised interpretation. Dot Foods paid the tax, and filed a refund claim, eventually winning in the Washington Supreme Court in 2009. In simple terms, the court held the state's new interpretation was incorrect, and the state simply can't change it's long-standing interpretation of a statute without changing the legislation itself. The court said:

"The Department's argument for deference is a difficult one to accept, considering the Department's history interpreting the exemption. Initially, and shortly after the statutory enactment, the Department adopted an interpretation which is at odds with its current interpretation. One would think that the Department had some involvement or certainly awareness of the legislature's plans to enact this type of statute. As a general rule, where a statute has been left unchanged by the legislature for a significant period of time, the more appropriate method to change the interpretation or application of a statute is by amendment or revision of the statute, rather than a new agency interpretation."

 Dot Foods, Inc. v. Dep't of Revenue, No. 81022-2, SUPREME COURT OF WASHINGTON, 166 Wn.2d 912; 215 P.3d 185; 2009 Wash.

While Dot Foods 1 was going on, (2005 to 2009), Dot Foods paid tax under the state's new interpretation of the statute to avoid penalties and interest. When Dot Foods 1 was decided in 2009, Dot Foods filed a refund claim for the 2005 to 2009 tax years.

Washington amended the statute in 2010 after Dot Foods 1 was decided in 2009, and applied the amendment retroactive to when the statute was originally enacted in 1983. According to the Washington State Budget and Policy Center's report in May 2010,

"the legislature enacted technical corrections and clarifications to state tax laws that will prevent steep revenue losses in the current year and in future years. This includes the legislature’s response to a recent State Supreme Court case that greatly expanded an exemption originally intended only for companies such as Avon and Mary Kay that sell products solely through door-to-door salespersons (Dot Foods decision). Without legislative action, the state would have lost about $151 million in the current biennium due to refunds and new firms claiming the exemption."

Under the authority of the retroactive amendment to the statute, Washington denied Dot Food's 2005-2009 refund claim (note, some of these tax years have been settled). Dot Food's challenged the ability of Washington to change the statute retroactively (Dot Foods 2). The Washington Supreme Court ruled in the state's favor in March 2016 holding that the legislature's amendment which retroactively narrowed the exemption and prospectively repealed the exemption, did not violate a taxpayer's rights under the Due Process Clause of the U.S. Constitution, collateral estoppel, or separation of powers principles. The court said:

"Retroactive application of the amendment did not violate due process protections because the amendment served a legitimate legislative purpose and was rationally related to the legitimate legislative purpose. The amendment prevented large revenue losses and removed preferential tax treatment for out-of-state businesses. In addition, the requirements of collateral estoppel were not met because collateral estoppel does not apply to subsequent taxing periods that were not previously adjudicated. Finally, since the taxpayer could not point to any evidence that the legislature intended to affect or curtail a prior judgment in the case, retroactive amendment did not violate the separation of powers doctrine."

Dot Foods, Inc. v. Dep't of Revenue, No. 92398-1, SUPREME COURT OF WASHINGTON, 185 Wn.2d 239; 372 P.3d 747; 2016 Wash.

Dot Foods requested the U.S. Supreme Court to review the case. We are waiting to learn if the Court will. Here are links to briefs filed by various organizations in support of Dot Foods:

• TEI Brief
• COST Brief
• American College of Tax Counsel Brief

Note: I am working on a more in-depth article for my column in Tax Analysts State Tax Notes.

Stay tuned. 

The 'Most Significant State Tax Policy Issues'

David Brunori will be in Las Vegas this week speaking at the Council On State Taxation annual meeting (Friday morning) with Doug Lindholm, Helen Hecht, and Richard Pomp. They are leading a debate/discussion on the most significant issues in state tax policy. I can't be there, but thought I would give my two cents. 

I think some of the most significant state tax policy issues are:

• the imposition of sales tax collection obligations on remote retailers;
• expanding the sales tax base to services;
• whether states should ramp-up transfer pricing training/positions or join the MTC ALAS program;
• whether states should adopt tax haven legislation which allows them to cherry-pick the taxation of foreign income or simply adopt mandatory worldwide combined reporting;
• whether states should continue to enact unconstitutional legislation forcing taxpayers to go to court;
• whether states should continue to enact retroactive legislation;
• whether states should continue to enact legislation that benefits in-state taxpayers vs. out-of-state taxpayers (i.e., market-based sourcing, single-sales factor apportionment, credits and incentives).

What do you think are the most significant issues in state tax policy?

TEI Says Retroactive Legislation Disrupts Taxpayer Expectations

On September 20, 2016, Tax Executives Institute, Inc. (TEI) issued a new policy statement on retroactive tax legislation. The policy statement takes the position that sound tax policy and administration require governments to provide taxpayers with certainty and fairness, and these principles are not satisfied when legislatures are permitted to enact retroactive tax legislation without meaningful limits.

In TEI's statement it asserts that allowing retroactive legislation to overrule a judicial decision "disrupts taxpayer expectations." I agree. As I have stated before in several blog posts, retroactive legislation creates unnecessary uncertainty, and unintended consequences. States have an obligation to create a stable and reasonable compliance environment that doesn't keep taxpayers guessing.

Multistate Voluntary Disclosure Program?

Are you aware that a taxpayer with potential tax liability in multiple states could negotiate a settlement using a uniform procedure coordinated through the National Nexus Program of the Multistate Tax Commission (MTC)?

According to the MTC, this service is to encourage taxpayers to start filing and paying taxes in states where taxpayers have substantial nexus. The MTC believes this process is faster, more efficient, and less costly for taxpayers who have potential tax exposure in more than one state. There is no charge for participation in the program.

The program generally allows taxpayers to file a voluntary disclosure agreement for tax types such as sales/use tax, and income/franchise tax (including the Hawaii GET and Washington B&O tax). 

Prior contact between a state and the taxpayer for a specific tax type disqualifies the taxpayer from participation in the program for that tax type. "Contact" includes filing a tax return, paying tax, or receiving an inquiry from the state regarding the tax type. 

Once a taxpayer enters the program, the taxpayer is required to file returns, pay the tax due, and register with the state. In return, the state waives penalties for the duration of the look-back period. Interest is still due on unpaid tax obligations during the look-back period, unless waived by the state.

The look-back period includes the number of prior tax years, and the incomplete current tax year for which taxes and interest will be due and paid under the agreement. The look-back period is determined by the state and specified in the agreement. The look-back period is generally three or four years.

The MTC claims that it keeps the identity of the taxpayer confidential during the process. The MTC only discloses the taxpayer's identity to a state after the taxpayer has entered into an agreement with the state. 

The MTC also claims that it does not disclose the agreement or any of its terms to any other state.

An applicant is not required to disclose any information that would reveal its identity prior to the execution of an agreement.

For more details on the program, go here.

Were you aware of the MTC's Multistate Voluntary Disclosure Program?

Have you used the MTC's Multistate Voluntary Disclosure Program?

If yes, was it a good experience? Pros and cons?

Leave a comment or e-mail me at strahle@leveragesalt.com.

DO YOU NEED STATE TAX AMNESTY OR VALIDATION?

AMNESTY

The Council on State Taxation (COST) has updated its schedule of 2016 State Tax Amnesty programs. See here.

If you would like more information about amnesty programs versus voluntary disclosure programs, check out some of my previous posts.

VALIDATION

On a separate note, I am always trying to think of unique ways I can help companies and accounting/law firms avoid and resolve controversy. To that end, I have started a new service called RESALT.

RESALT is my second-opinion service where I review research and conclusions made by others (i.e., you, your staff or consultants). This gives you another 'set of eyes' and peace of mind when taking a position or deciding to move forward or not. 

I conduct this service at flat fee per project or per month. I review the facts, research and conclusions already reached. I then conduct additional research to validate or dispute conclusions. I provide you with a written validation, or dispute of the conclusions along with citations to my research for support.

Go here to learn more.